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tv   Politics Public Policy Today  CSPAN  August 5, 2014 1:00pm-3:01pm EDT

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avoiding repatriation, which triggers the home country tax on foreign profits under our current system prompts firms to allocate economic resources in an inefficient manner. examples include making value decreasing foreign acquisitions or the inability to respond to domestic investment opportunities. maintaining a worldwide system, but eliminating deferral, would greatly reduce these costs. adopting a territorial system may not. firms operating under territorial systems face implicit costs when attempting to circumvent anti-abuse legislation, which serves as a backstop that otherwise impose as home country tax on foreign profits that have not been subject to robust tax system abroad. to my knowledge there is no estimate of these costs, but my expectation is that they would be greater than under a worldwide system without deferral. my overall assessment is that our international tax system can be adequately reformed.
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we need not entirely abandon our current system in favor of a fundamentally different system. limiting deferral and lowering the statutory rate would generally reduce incentives to shift income, eliminate the implicit cost of avoiding repatriation and reduce complexity and uncertainty for firms. thank you, and i would be happy to answer any questions. >> dr. robinson, thank you. our final witness, mr. alan sloan. >> chairman wyden -- how do you do this? >> it's on. >> chairman wyden, ranking member hatch, members of the committee, i'm flattered to be here, and i'm honored -- especially pleased to be hitting back-up -- cleanup, which is my normal role in journalism. before i proceed, i have to say that i'm speaking for myself alone. i'm not speaking for "fortune" magazine, my employer. i'm not speaking for "fortune's"
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owner, time, inc., i'm not speaking for "the washington post" which has run by material for more than 20 years. i, like senator hatch, am appalled to see that inversions are becoming a partisan wedge issue. i don't like this. now, at "fortune" several weeks ago we put an american flag on the cover, we called inversions positively un-american. but we weren't being partisan. we were being americans. "fortune" is divided between republicans and democrats. we're acting collectively, not in the socialist sense, but in the societal sense. this isn't a republican problem. it's not a democratic problem. it's a problem for everybody. it's for all of us. and if you don't stop inversions now with some sort of band aid, by the time you get around to doing it, there will be tens of billions of dollars of taxes that will have been lost and
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will never be recovered. that will having lost and will never be recovered. now i am familiar -- i've been writing about inversions and researching them for months. i've heard the argument, well, inversion is a symptom. you can deal with them unless you deal with the whole problem. you deal with the problem, you deal with inversions. well, i happen to have a doctor -- daughter who is an emergency room doctor. and when someone shows up at the e.r. bleeding, they first thing they do is they put on a tourniquet, they stabilize the patient. and then they try to deal with the underlying problem. they don't say, well, gee, we have to deal with the underlying problem. you've got an emergency here. it may not seem that way but you've got the beginning of, i think, a massive flood of inversions, unless you stop this. now, i know very little about tax. i know very little about law. but i do know something about wall street and manias.
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and i look at this, this inversion thing, it reminds me of the do the- -- dot-com bubble where people did things that were just crazy. but everyone was doing them. all of these people with degrees and a lot of money and fancy suits whispering in your ear, well, you've got to do this. so people did it. and it was just a disaster. so i've written about wall street for large parts of my career. and they gave us the internet bubble. they gave us toxic subprime securities. and now, they're giving us inversions. it's a product. it's the latest thing that's good for wall street. there's this whole rationale that surrounds it, but i don't think it's good for society. it just doesn't work. and since i don't pretend to understand anything about the international tax system, except
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that i don't understand it, and i'm a simple person. i'm a recovering english major. i'm not a legal person. i mean, to me, if i were you, which will probably never happen because i'd have to be nice to people and be polite, and i don't do that well. i would adopt one of the 11 bills, and sandy levin will probably be angry with me, but i would adapt the carl levin version, the one that has a time, expiration in it. because if you can just stop these things for a while, you can buy time to fix the system. if you sit around and say, well in a few years, we'll do this, it will all be fine, by then, the patient will have lost so much blood, it's going to be very, very hard to do anything remotely revenue neutral in a tax reform.
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the other complaint, again, i've heard endlessly, oh, it's so unfair to make this may 8th which is the date in the transaction which i believe also happens to be the date that senator wyden published his op-ed in "the wall street journal" which messed me up because he wrote what i was going to write so i was furious. but i came here anyway. so the may 8th deadline was known, okay? if you look at the contracts of some of these deals there are provisions in there, you know, in case the anti-inversion stuff changes. so it's not as if this is unprepared or unfair. i mean, everybody knows this. you changed rules retroactively in 2004. and as best i could tell there was not earthquakes or brimstone or fire from the sky. so, please, you know, if you can act like americans, which i know you can, instead of squabbling. and you get the senate to go along and deal with the house, we can stop -- we can put on the tourniquet.
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we stop the patient from bleeding out, then we fix the system. and that's what i hope you will do. thank you for your time. i'm happy to answer any questions. >> mr. sloan, thank you. colleagues, we'll stick to five minutes, we'll get in as many as we can. i'm going to ask one question of all of you. i'm going to start with you, mr. stack. i have been about as big a flag waver for comprehensive tax reform as anybody around here. and i am going to continue to keep pushing for bipartisan tax reform as aggressively as possible. the reality is nobody believes that you can get comprehensive tax reform passed this year. and with the investment bankers in that inversion feeding frenzy, there may be 25 more inversions during that time.
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so, i'm just going to go down the row here this morning and ask each of you, will that be a bad thing for america? mr. stack? >> yes, senator, that's a bad thing for america. that money is not just a one-time hit. that is a hit we take the year a company inverts. and it's a cost we incur throughout the ten years of a budget window. in addition, i just want to add, companies not only reduce their u.s. tax bill on day one when they invert, but they also adopt techniques to keep stripping out of the u.s., for each of the next ten years as well. so we get hit with a double whammy. it has a long-term effect. it's permanent. so the cost of waiting i think is very high. >> mr. saint-amans. >> i think, also, it's bad. it's a symptom of a disease. either you trap cash abroad when prevents companies to reinvest in the u.s., and i think that's one of the challenges of the u.s. tax code to date. or you result in inversions meaning that you lose the
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control of these companies which invert in another country and that's a plus for the u.s. overall it's bad, and it's a symptom of an issue in the tax code. >> dr. desai. >> i think in the short run it will feel good to do something. in the long run, it's not going to help the country. it will have unintended consequences. i think there are a lot of medical analogies which are being turned around today which are helpful. rather than a tourniquet, we may have a bleeding patient and these things might just anesthetize the patient. >> i think i'm going to take that as a no. dr. merrill. >> on this one, i very much agree with the comments of pascal which is these transactions are a symptom of a very broken system. and certainly, i can understand the desire to put on the tourniquet, but if you leave it on too long without resulting in the underlying problem, you get gangrene. so i can understand the desire to do something in the short
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term. but there is the risk of unintended consequences. so fixing the system is ultimately the only real answer to stop the problem. >> so you're in the middle of all of this. we'll put you down in that way. my concern about that position for both of you is that tax reform is moving slowly. inversions are moving rapidly. and that is a prescription for chaos. and that is why i want to see us address both of the issues in a bipartisan way. dr. robinson. >> i don't have any -- any data on this but i do remember reading about inversions, companies leaving other countries such as the uk. and then when a tax system is reformed, they have come back. again, i don't have any data on that, but my sense is that these companies may not be lost forever. i also think, as far as i
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understand, inversion transactions, it only affects the tax on the future -- future income. it doesn't impact the tax on the accumulated earnings. so in that respect, i don't think we run the risk of waiting to solve the real problem and sort of letting the markets play out as they do. >> you think it would be a bad thing? okay. mr. sloan. >> i think letting 25 companies invert and then fixing the tax code is a recipe for disaster. i know a little bit about how inversion works. and mr. stack is absolutely right that the problem is not so much what happens to foreign profits. but it becomes much, much easier to move money to earnings strip out of the united states. and you have to stop this. and at some point, when we're not on the clock, i'll bandy medical analogies with my colleagues.
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but this is not the time so we'll let that go. >> let me see if i can get one other question in, i'll make this for you dr. desai, given what you've said. let's take walgreens. walgreens is an american icon. it's located in the heart of our country, and they are talking about inverting right now. should americans be concerned about the prospect that if walgreens inverts, they will strip profits out of the united states, and put them into tax havens? is that something americans ought to be concerned about? >> without question. absolutely, there's no question about that. the secondary question is what do we do about it. but absolutely, we should be concerned. >> senator hatch. >> thank you, mr. chairman. this question is for dr. robinson and dr. merrill. dr. robinson, in your written testimony, you write, quote there's no evidence to support the assertion that u.s.
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multinational corporations are at a competitive disadvantage because they face larger corporate tax burdens than their competitors under a worldwide and territorial tax system, end quote. you then cite three studies in support of your statement, including one study which finds u.s. multinationals have effective tax rates that are 4% lower than multinationals based in the european union. but aren't there numerous studies that show that u.s. multinationals are subject to higher effective tax rates than foreign-based multi-nationals. and that seems to indicate that the u.s. -- well, let me put it this way. let me give you an example. dr. merrill cites numerous studies showing in his written testimony a congressional research service released a report earlier this year studying effective tax rates. and one part of the report, c.r.
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notes that the effective corporate tax rate in the united states is 27.1%, as compared to the rest of the oecd countries that have an unweighted average of 23.3%. that seems to equate that the u.s. corporate tax rate is almost four percentage points higher, not lighter than the other oecd country, at least by one measure. now, would you please comment on this. i'd also like dr. merrill to comment on the effective tax rates phased as compared to foreign-based multinationals. >> all right. the studies that i quote in my written testimony measure accounting effective tax rates from financial statements. i'm not sure what dr. merrill is going to follow up in terms of his study. it maybe a difference in how tax rates are measured.
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but in the accounting literature, there have been a number of studies, published and unpublished, that have searched extensively in differences for the accounting tax rates in firms resident in worldwide versus territorial countries. and also looked at, as i mentioned, the effect of these effective tax rates on decisions. there isn't, at least to my knowledge, in accounting literature as measured by an accounting effective tax rate, any evidence to suggest that u.s. firms have higher rates. >> so, in my written statement, there is the comparison of about six different studies that compare effective tax rates to
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u.s. and foreign companies. none of the studies are specifically focused on the foreign income of multinational companies. and, perhaps, this is what dr. robinson's comment is referring. the studies i referred to to look at u.s. versus foreign companies including accounting data. one of the studies there, published by the business roundtable, compares the financial statement accounting tax rate of companies in 58 different countries. the u.s. had a higher than average book effective tax rate than the other multinationals in that study. world bank does a study. we helped them with that. compare taxes in 183 countries. looking at purely domestic companies. and there's several other studies that i cited there that have you focused primarily on domestic investment.
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so there are a range of studies. i must say, that looking at a broad range of studies, almost every study i've seen has shown when you do an international comparison of the u.s. effective tax rates versus foreign, whether it's foreign statement whether it's done through marginal effective tax rates, the u.s. consistently comes up above average. i put that on my testimony because it is commonly thought that effective tax rates at u.s. companies are low. but international standards, according to all the studies i've seen, except for ones actually in leslie's testimony, the u.s. comes up in the top tile. >> may i address? >> yes. >> this question is for dr. desai, it seems that discussion in tax reform can result in the debate of capital neutrality versus capital import neutrality. such a discussion usually is not helpful, in my opinion. and typically ends up going nowhere. you have developed an interesting new theory of international taxation. capital ownership neutrality.
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the idea being that a tax system should not distort the ownership of assets. and in fact, capital ownership neutrality seems to fit in nicely with the acquisition inversions that we're seeing today in which a u.s. corporation across a smaller foreign corporation inverts as part of acquisition. it seems that the u.s. corporation is at a disadvantage if it is competing against a foreign corporation, based in a country with a territorial-type tax system. as we know, most developed countries have adopted territorial types of tax systems. in fact, 28 of the 34 oecd countries have territorial type tax systems. is the accurate that the u.s. corporation is at a disadvantage? >> doctor, if you could, i brief answer because i want to
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recognize senator grassley. >> yes. we develop neutrality. the central idea is what you said. what matters is not where the dollars go but who owns what. in the context we're talking about, it's clear these inversions are manifestations that u.s. firms aren't good owners because of taxation of assets around the world. clear as to why territoriality makes sense. >> mr. chairman, here's what i'd like to do with my five questions. i want to ask mr. stack a question, let him think about it 4 1/2 minutes, led him read a -- i want to read his statement, then stop so he can answer my question. >> colleagues, at this point, we have had a vote called, and i think it's the consensus of the members, that we'll have to break. we'll get as far as we can. senator. >> mr. stack, this is a question i'd like to have you think about. the treasury has recently
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informed me it has finally begun work on a report mandated by the american job creation act to study the 2004 anti-inversion provisions. when does the treasury department expect to finnish its study of the 2004 inversions legislation, and before enacting such important legislation, shouldn't treasury at least complete the report mandated to study the issue? like most of my colleagues here today, i've deep concerns about the practice of companies moving overseas for the primary purpose of avoiding u.s. taxes. average americans and companies that remain in america are rightfully outraged. when companies leave the united states, leaving the rest of us to foot the bill. that's why in the early 2000s, i led an effort to prevent companies from simply setting up a filing cabinet and a mailbox overseas to escape millions of dollars of federal taxes.
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in 2004, when i was chairman, i was successful in enacting reforms that established rules, governing inversion for the first time. under these reforms, an inverted company continues to be treated as a domestic company until there's a significant change in ownership. or substantive business activities are located in the foreign country. a second feature of these reforms prevents an inverted company from skipping town without first paying taxes on untaxed earnings. prior to these changes, all the company had to do was move its tax home out of the united states and file papers with a tax haven. there were no rules or standards for determining whether a transaction had substance or was purely a tax avoidance scheme. a number of companies took advantage of the lack of rules and standards to move to the cayman islands or bermuda as examples. these inversions were purely paper with no substantive change
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of operation. in 2004, provisions have successfully curtailed abuses targeted by the legislation as a nonpartisan congressional research service has said, these reforms, quote, effectively ended shifts to tax havens where no real business activity took place. this is not to say inversions no longer take place. the 2004 reforms were never intended to establish a berlin wall that forever trapped companies in the united states regardless of business needs. these reforms were targeted at and put an end to egregious abuses epitomized for augelin house which serves as mailbox headquarters for thousands of corporations. the in versions currently in the news mainly involve a large u.s.
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multinational merging with a significant, though smaller, foreign company, usually european. these are not the traditional tax haven countries with little or no corporate tax, but major u.s. trading partners with competitive tax systems and rates. there is little question that lowering one's tax bill continues to be a factor in companies deciding to invert. however, unlike transactions in the early 2000s, these are substantive transactions that come with both risk and benefits for companies involved. as a result, factors other than taxes likely play a role in deciding to invert. i do not condone that behavior. one area that should be studied further is a role of tax rules that allow inverted companies to strip income out of the u.s. plays in a company's decision to
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invert. i'm going to stop and put the rest of it in and ask mr. stack to answer my question on the study we asked for. >> sure, senator. as we mentioned in our letter to you last week, now that we've gotten guidance out in areas of inversions, we are working on the study. i apologize. i cannot give a specific time frame for answering it. i would say that given the pace of inversions that have picked up recently, we would not think there would be a need to await the study to bring back our full attention to this issue which is happening before our eyes. >> thank you, mr. chairman. >> thank you, senator grassley. senator brown. >> thank you, mr. chairman. i would talk for a moment about a question for you, mr. stack, about earnings stripping. companies are using intercompany debt to lever up their u.s. subsidiary and deduct interest up to 50% of pretax earnings, as you know, shifting profits to the lower tax country. the second element of this tax
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arbitrage is shifting intellectual property and attributed profits to tax havens. my question is what do we do right now to create a kind of temporary trip wire that will allow legitimate mergers, but prevent those arbitrage-driven inversions? >> thank you, senator. one of the reasons we singled out these anti-stripping proposals in our budget, even without reform these things are going on now and going on particularly in cases where we have inversions. so whether it be interest stripping, making it harder to take intangibles out of the united states, changing the treatment of instruments that you can take a deduction here and have no income inclusion somewhere else, we think these are all urgent needs that would protect our base even before we do tax reform and will also protect our base while the inversion wave is happening, and they're very important. >> thank you.
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mr. chairman, i want to ask a question of mr. sloan. i want to make one comment. the more we read about this and i appreciate the chairman has brought this out more effectively than anybody in this senate. when people in this country increasingly think the system's rigged, people in this country increasingly see large companies find ways of avoiding taxes. people struggle to pay their own taxes. people see these large companies having benefitted from a manufacturing tax credit, infrastructure in our country then using legal means, nobody's arguing -- most of us are not arguing they are using legal means finding ways to avoid taxes. i think this committee needs to take this charge very seriously that the public loses, increasingly loses confidence in this tax system causing others perhaps to cheat and loses, increasingly loses confidence in
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this whole legislative body's inability to do anything. if we can't narrowly follow mr. stack's advice and senator wyden's ideas and do something narrowly now about inversions, we clearly have not lived up to our public charge. let me ask a question, mr. sloan. we were seeing increasingly more and more stories from senator levin's work on his subcommittee that hedge funds and investment banks are big drivers of these deals which indicates a potentially short-term focus on stock price and fees, the rewards to wall street are plentiful, as mr. sloan said. premiums offered to shareholders of foreign companies so inverting companies may avoid u.s. taxes. if you would answer a couple of questions, if would you, mr. sloan. what role in your mind do equity funds and private equity funds, investment banks hedge funds play in encouraging companies to avoid taxes by completing an inversion? is there any counterweight to
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this pressure companies received from short term focused investors? >> all of these players are in business to make money. they are in a competitive business. they want to show a higher rate of return than other people so they can continue to attract more money and get more fees. and as long as something is not illegal, they will do it. and if you talk to them socially, they're not bad people. they're human beings, even like senators and journalists. they're regular people, but they have these forces that drive them. and i think they are perfectly fine corporate ceos who, if you people will just protect them and get rid of the inversion temptation, they are happy not to invert. but everyone now feels pressure and everyone's scared. it's becoming a mania.
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by the time it waves, it fades away, it's too late. >> thank you, chairman. >> thank you, senator brown. senator schumer is next. i am going to try after the first vote to run over and vote because we have colleagues who feel very strongly about this. senator schumer. >> thank you. i want to thank you and senator hatch for holding this hearing today. it's critical we develop and combat a proposal to combat this growing trend by some u.s. corporations to leave our borders for tax avoidance purposes. there's been a significant uptick in the number of in versions over the past 10 years. 47 u.s. corporations reincorporated overseas through these inversions. during that period, now there are more than a dozen perspective deals. many of my colleagues, particularly on the other side of the aisle argue we shouldn't be looking at this issue in a vacuum right now. they say we should instead be focused on corporate tax reform. i would ask those arguing that we wait for tax reform just how
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soon do you think that's going to be possible? chairman camp tried tax reform on the republican side. even speaker boehner didn't give it much credence. so if we wait for tax reform, we're going to have lots more inversions and it's going to take far too long if we ever get to tax reform at all. saying that we should wait for tax reform to deal with inversions is a green light to allow many more inversions to occur. for some who make it, frankly, it's an execution to keep this loophole in place for the foreseeable future. the tax reductions achieved through inversions happen in a couple of different ways, mr. chairman. first, by moving their domecile, they are no longer on u.s. tax on their international operations, and this has been appealing to companies that operate in a global supply chain
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like pharmaceutical companies. today we're seeing uptick in traditional brick and mortar, walgreen's doing the same thing. why is that? well, it's the second piece of the inverter's tax avoidance equation. not only can these companies avoid paying taxes on their international operations, they can avoid paying taxes on their u.s. taxes that remain in the united states. one way they do this is through a mechanism in the tax code called the interest expense deduction. it's a five-step process. they set up a u.s. subsidiary to operate their u.s. business. when that subsidiary owes u.s. taxes, they transfer the corporate funds between the foreign parent and subsidiary and call it a loan to the subsidiary. that loan triggers a u.s. tax deduction, the interest expense deduction for this subsidiary, which largely off sets their u.s. tax liability. the loan is repaid through the
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profits of u.s. tax subsidiary to the foreign parent, and u.s. taxes have been avoided. as a result, they pay little or no tax on their u.s. profits, as well. now, we've attempted to limit this type of behavior in the past. we put a cap on the debt-to-equity ratio of the u.s. subsidiary, but the current law still provides very lucrative tax benefits for intercompany benefit. in fact, mr. sloan, your magazine or your website did an op-ed on this talking about the risks and rewards of inversions, which mentions the interest expense deduction. so as we work together to put a proposal to combat this growing challenge, we have to look at it from every angle. now, i support the proposal that senator levin and the administration have been working on, an immediate two-year moratorium and increasing the number of foreign shareholders to implementation minute version from 20 to 50, making it more difficult to happen.
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i do have concerns with the management and control part of the levin proposal because we want to keep jobs at home and the management control proposal may encourage jobs to grow abroad. levin's proposal is not enough. we have to go further. we should include a proposal that further limits or disallows the interest expense deduction to deal with the u.s. profits that they are also trying to avoid. doing so will be a deterrent for those considering an inversion as they'll no longer see that opportunity to avoid u.s. taxation, and it will deal with the retro active problem. you eliminate it prospectively, but any company that did an inversion six months ago, a year ago, five years ago will still lose this deduction. so it's a prospective policy action to counter past and future inversion activity. it would ensure we don't leave those inverters at the front of the line, the ones who started the trend with a competitive disadvantage.
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mr. stack, my only question, my time is running out. i know your colleague is waiting. does the administration agree that we should consider measures to further limit or disallow the current interest expense deduction for inverters in any legislative package we pursue to combat inversions this year? >> yes, senator. we fully agree. we think you've shone a light on a very dangerous part of the inversion craze. the ability the day after the inversion transaction to continue to strip the u.s. tax base we have a budget proposal to that effect, but think you are pointing to a very critical aspect of the problem. >> thank you. i want to say to companies doing inversions, you want to operate here, you want access to this market, access to the work force, access to the economy, understand this here today, to continue to have that access, you are going to have to pay your fair share of u.s. taxes. things are changing.
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>> thank you, senator schumer. the time for the vote has expired. we are going to go. i'm going to come back as quickly as i can. thanks. >> i wanted very much to be here even though we have to go running out. thank you to each of you. i want to say to my colleagues, we have a place to start tomorrow which is to bring jobs home act. i'm very pleased to be working. it takes a simple first step on what needs to be a series of steps. we'll simply say, if you want to move your company overseas, we're not paying for the move. we're not going to allow you to write off your costs of moving out of this country. if you want to come back, we'll be happy to let you write that off and give you an additional 20% tax credit. if you leave, you're on your own. that's not enough because we allow folks to only leave on paper. they are not picking up their plant and leaving. i will say, mr. sloan, i couldn't agree with you more. this is not a partisan issue. this is an american issue. i think the american public is
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going to be watching very closely to see companies that need consumers who are doing this. i think they underestimate the reaction of consumers and other businesses in going forward. i do think if we can move forward and overcome a filibuster, get on the bring jobs home act, we could add, carl levin, i'm with you, even though i serve with both my dear colleagues sandy and carl in michigan, carl's approach of a two-year effort to get us to tax reform is the right way to go. we could add that certainly with the bring jobs home act. i believe that we need to do that and we need to get started on this. i also think it's important, you are right in terms of -- certainly all of you saying we need tax reform, we need to do that, we know we need to do that. we know we are in a global economy.
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we have to address this. but we also do know that i don't know of any sector paying 35%, our corporate rate. the reality is we have a lot of incentives, we want incentives that relate to manufacturing or r&d or other things, but when i look at the list, from medical devices at 18.8% or financial services 16.5% or petroleum production 11.3% or down to public/private equity paying 0.8% rate, a large disparity and a number of issues we need to address. here is what i want to comment on. that is the issue around -- we have two issues. corporate tax reform, global economy, how do we address this and incentivize making things and growing things in america and innovation in america.
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then we have folks that just plain don't want to pay their fair share and benefit from america. so you've got folks on inversions who, they don't want to breathe beijing's air. they want to breathe american air. they don't want water of third world countries. they want to drink the water. they don't want the rule of law of a lot of countries. in haiti talking to our business, as you pull up a cargo ship you can't get the product off the ship without paying a whole bunch of bribes. so they want our rule of law. they want our innovation, education, infrastructure, breathe the air, drink the water, they just don't want to contribute. that doesn't sound like normal american values to me. what it does is create a race to the bottom where we're not going to have customers, then we're really not going to have businesses as we go forward on here. this is a deep concern to all of us. i guess, mr. sack, i would simply ask when we look at competitiveness internationally from your perspective, certainly
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the rate is important, but we know even going to 28% that means eliminating r&d tax credit, section 199 for small businesses. that means eliminating accelerate depreciation which is so critical in a state like mine with manufacturing. there's got to be more to it than just tax grade in terms of investing in america. i would ask you if we are going to stay competitive internationally, make things and grow things here, what are some of the other priorities besides lowering the rate? >> thank you, senator. first on the rates, i would also add the point that a lot of the discussion about rates kind of ignores the fact that there will always be countries with lower rates than ours where people may want to seek to go. there is this tax competition going on. in terms of other things we could be doing, the first thing i want to point out and this relates back to rates, our effective rates, as you were pointing out, vary widely. we don't have a level playing field across our industries.
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number two, we don't have a level playing field for countries that can take ip and put it offshore or have a broad enough market offshore to take advantage of some of these international provisions. in addition to lowering the rates, we think it's very important to broaden the base for these taxes so we can create some equality, eliminate the winners and losers so that everybody has the advantage of this lower effective rate as we go forward. as you also point out, maintaining incentives for research and development so that we remain the premier country in terms of this type of activity is also of critical concern. >> thank you. i believe at this moment i better get over to vote or i'm going to miss the vote. thank you very much. are we in recess? we are in recess at the call of the chair. thank you very much.
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very much appreciate senator portman's patience. he and i have talked often about tax reform and look closely to working closely on these issues of tax reform. senator portman. >> thank you, mr. chairman.
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yeah, i have had some long conversations with you, and i appreciate your championing tax reform. i liked your first response to the inversion proposals. we have a little difference of opinion on tactics here. i do think this is an opportunity to encourage solving the problem rather than dealing with the symptom. we've heard a lot of testimony today about what will happen if we just go after this particular issue. i know there's some differences among the panelists, i don't think there's any difference among the panelists about the fundamental problem. >> i've spent time talking about this issue, bottom line is it isn't advantageous to be an american country. it's better to be a foreign company tax system great majority of our competitors, 93% of our foreign competitors, as told today, do have a
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territorial system, lower rate. it's a deadly combination to have this high rate and have the worldwide system. i don't think what we're talking about in terms of a short-term fix is going to help. there's good testimony today about how it could even hurt because if you just deal with inversions, you have some unintended, but perhaps negative consequences, demanding the location of even more jobs overseas is what dr. desai talked about. my concern is foreign acquisitions. recently we sat down with a lot of u.s. companies to talk about this issue. in fact, i've been doing this for the last few yearsish as some of you know, and worked on this in the super committee. we are hearing over and over again the fact already foreign acquisitions are on the rise, even without this rule. if we put this rule in place then we could limit the deductibility of interest as one of my colleagues said, and we could make it harder to be an american company. we'll have more and more foreign companies owning u.s. assets.
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some of those will be takeovers. recently, biopharmaceutical company came to see me, last week, from the boston area. i asked about the acquisitions in the boston area biopharma companies. 28 companies have been acquired in the last several years. 17 of those 28 were acquired by foreign entities. you sort of put the hole in the dam here and you have a flood over here. you have a worse result, even more pressure, on jobs leaving this country. so i mean we talk a lot about revenue and income-stripping and earnings stripping. i agree when you have a tax code that captures income in the most efficient way, but this is about jobs. my question, i guess, to mr. stack is, you know, what's going to happen if we continue to make it harder to be an american company. aren't we going to see more, not just acquisitions, but acquisitions of american assets?
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they tell me because foreign companies have higher after-tax profits, it's more profitable for them. they can pay a premium for our assets for subsidiaries being sold. you'll see american companies shrinking if not being taken over by foreign entities. what's your answer to that? >> senator, i think that the tax code, as we look out in terms of leveling this playing field, i think it is important for us to take as an opening step that we will never be able to offer, let's say, rates as low as countries that are trying very hard through tax competition to lure companies overseas. so there will often be some kind of tax differential between the united states and other countries that might on the margins fuel some of that acquisition activity. we have a lot of great things in this country though that keep companies here and keep them competitive and keep them doing very well. so i do agree then, and all the
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plans on tax reform seek to lower the rate, and there is universal consensus that our rate is too high and we should be bringing it down. when we bring it down, we will come closer to level the playing field with those foreign acquirers. >> i think this is not just an important problem. i think it's an urgent problem. you have all sounded the alarm here. we have differences on the panel and on our panel as to how to address it. seems to me the only time you see tax reform is when take the lead, omb has to be involved in the numbers. what's treasury doing? tell me what concrete steps are being taken to address this, as said today, emergency situation. is it just to plug the hole in the dam here or are you actually looking, as the president has talked about over the last couple of years, actually solving the underlying problem? >> sure. senator, the president's framework in 2012 really was kind of a far-reaching move forward.
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to think differently about our international tax rules. and that is to say it was going to be able to bring down the rates, broaden the base to deal with some of the differential effective rates i mentioned earlier. but also through the foreign minimum tax, try to cut out some of the game playing that goes by stripping into, you know, very low-tax jurisdictions. we think that kind of set the tone for some of the work that was done both in finance committee and by chairman camp. and that there's a very robust set of proposals, you know, on the table right now. in addition, for many of the things we're talking about today in terms of base stripping, we put several detailed proposals in our budget to get at this opportunity once a company inverts to strip out of the u.s. base, which as everyone knows provides a lot of juice for these transactions so that they can do better once they're offshore reducing u.s. taxes than they could before. so we think we've shown leadership in our framework.
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we think we've shown leadership in putting concrete proposals in our budget. i know the president and the secretary stand ready to work with congress on both sides of the aisle to push through international tax reform. >> love to see a proposal. i'd love to see that push. maybe my colleagues see more of it than i do. i've had great conversations with individuals at the treasury and in the administration, including at the white house. but i just don't see the push. i hope we'll use this unfortunate situation where we've got examples every week of another major inversion, another one this past week and happened to be a pharmaceutical company, to actually get us to the point where we're solving the underlying problem. if we make it worse by making it even less advantageous to be a u.s. company, i really worry we'll look back five years from now and see a hollowed-out american corporate base and wonder, what happened? what happened is we and indicated -- abdicated our responsibility here in doing our things we have to do to reform our code to make it competitive. i know my time is up, mr. chairman. i appreciate the testimony today. i hope it results in very
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specific action by the administration and by the congress. >> thank you, senator portman. i look forward to working with you on these matters in a bipartisan way. i'd say to our guests, i have some additional questions. senator hatch is on a very tight timeline. so i'd like senator hatch to go first. >> very gracious of you, mr. chairman. i appreciate it. it's a pleasure to work with you. this question is for dr. merril. as you know, both japan and the united kingdom adopted territorial types of tax systems in 2009. switching from a worldwide tax system with deferral. these are two countries with large economies. japan is the third largest economy in the world. and the united kingdom is the sixth largest economy in the world. can you tell me why japan and the united kingdom switched from a worldwide with deferral system like the current united states tax system to a territorial
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system? and after five years of experience with a territorial tax system, what have been the results for both japan and the united kingdom? >> yes. thank you for the question. the united kingdom was experiencing phenomenon not unlike what we're experiencing now. now. they saw a number of large multinational companies. you know, some quite significant, that had actually moved their legal headquarters out of the u.k., primarily to ireland. and that was of great concern to the government. they decided that it would be appropriate to adopt a more competitive tax system along the lines of the quote in my oral statement so they would be -- their tax system would be more welcoming to multinational business. one of the factors for the u.k. is they have many companies there that earn only a small part of their total income,
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worldwide income, in the u.k. yet, the u.k. was -- had a tax system like ours that was taxing the worldwide income of companies that only earned a small amount of income in the u.k. so in order to become a more attractive location for multinational companies, they went to the territorial-type tax system, 100% exemption of foreign dividends. and they made a number of other changes, lowering their tax rate and a 10% refundable research credit. also adropted a 10% -- phased-in tax rate on income from patents. they also modified their cse rules. they've done a whole package of things mainly to make it more attractive for multinational companies to be headquartered in the u.k. and they've been successful, as dr. robinson mentioned. some of the companies that left the u.k. actually have moved their headquarters back to the u.k. in response. japan, different situation.
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obviously japanese economy has not been attracting the kind of growth that they've been looking for. and they saw japanese multinationals, like the u.s., facing very high corporate tax rate, worldwide system, money not being repatriated to japan. the ministry of economy, trade, and industry wanted to see that money come back for additional investment in japan, and that's why they made the change. >> thank you. mr. saint-amans, glad to have you here. i appreciate what you said in your testimony, that the work of the oecd is done by consensus. presumably, consensus of all member countries means that all member countries will consent to the work the oecd is doing or else the oecd won't do that work or won't issue such report. am i right on that? >> yes, senator.
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a consensus means that a report is agreed when no country around the table objects to it. >> and in making sure you have the consensus of the united states, please keep in mind our system of separation of powers. law making capabilities primarily invested with the congress. in obtaining the consent of the united states, it is necessary to get the consent of the u.s. congress. so we do appreciate you being here for this senate hearing. will you please assure me that you understand that to obtain the consent of the united states for the oecd's work, including for the vets project, the congress must be kept informed of the work, and that has to be working in conjunction with the u.s. treasury as well. >> senator, i do think that not
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only the secretariat of course, but all the oecd member countries are fully aware of this. we are more than happy to engage with the staff on the hill, with the senate, but without impeding on what treasury is doing, and i would like to add that most of the measures which are contemplated in the project, profit shifting, are soft low rules. these are common interpretations of standards, and they do not require translation by parliament but in formation of all stakeholders, and in particular the congress is taken seriously by the oecd secretariat. i won't speak on behalf of bob, but i think also by treasury. >> mr. stack, let me ask you the same question. please reassure me the u.s. treasury department will keep congress informed and not get ahead of the congress in the decision making process and in
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negotiating with the oecd. >> yes, senator. we fully intend to do that. i've already been up to the hill twice to meet with bipartisan staffs, both houses, and i look forward to continuing that throughout the process. >> we appreciate your work in that regard. thank you for doing that. i want to thank all of you for being here. i have to leave because of other commitments, but this has been extremely interesting. i'm going to read the transcript, and i'll know exactly what you all say. i'm going to hold you to it, too. thank you. >> he will. be on notice. we're moving towards the end of the hearing. senator portman may have additional questions. but let me give you my sense of where we are. i certainly am not interested in building any walls. i want to close a loophole, and then i want to drain the swamp. i want to fix this dysfunctional
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mess of a tax code so we have incentives for creating red, white, and blue jobs, creating jobs here in our country. i know we're going to be calling on you all often in the days ahead. i have a couple other questions about issues that are pending. senator thune, you're next. if i could just finish these two questions, we'll go right to you. the first deals with the implications of inversions on health care costs in america and the implications for the american consumer. i was struck by comments made in "the wall street journal" recently by the ceo of abbott, who said that he was concerned about the higher prices that american consumers would have to pay if proposed inversions like his company's did not go through. and i'm still trying to figure out how these savings are going
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to be passed on to consumers and of course to taxpayers who put up so much of the money that funds the medicare program. so mr. -- we'll ask all three of our professors. explain to me how somehow these costs, particularly medical costs, because so many of the inversions thus far are medical, explain to me how or even if -- because you've done some scholarship on this, dr. desai, how's this going to benefit the american consumer and the medicare program in particular? we'll start with you, dr. desai. >> so i think the broad way to think about this problem is to understand that this question relates to the broader question of the incidents of the corporate tax. so who pays the corporate tax? there's really three sets of folks who can play. so the first is customers, which is what you're referring to via the health care system. the second is workers.
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the third is capital or shareholders. so whenever there is a tax-saving move, like an inversion, we can expect those benefits to accrue to one of those three sets of people. either workers are going to get higher wages, shareholders are going to get higher returns, or customers will get lower prices. i think most of the consensus in the scholarship is when taxes change, they don't typically get transmitted to product prices. >> they don't get typically get translated to product prices, which would be the price that is americans pay for health care. >> in this example, exactly right. >> very good. thank you. >> they typically get translated more likely to wages and some degree to shareholders. >> very good. senator thune has just come back. we'll bring you into this question, dr. merrill and dr. robinson. and that is the impact of reform on the deferral issue. of course, one of the goals around which there's bipartisan support for corporate tax reform
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is to simplify the system. i think we all understand that the international tax is inherently complicated. my question is, wouldn't repealing deferral go a long way towards corporate tax simplification by eliminating the complicated system that exists today of tracking unused foreign tax credits and the related earnings and profits. in effect, income would be subject to either immediate taxation or exempt and the current foreign tax credits would be utilized against current taxable income. so answer the question, if you might, would deferral eliminate a very complicated feature of the tax system and would doing that as part of bipartisan comprehensive tax reform make the system more simple and understandable? >> dr. robinson?
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>> i do think, as i put in my written testimony, that the implicit cost of the u.s. tax system is higher than the explicit cost. and what i mean by that is that the cost associated with actually avoiding repatriation or maintaining deferral for long periods of time is what i believe makes our tax system uncompetitive. so i do think that eliminating deferral so long as the rate, of course, was lowered sufficiently would be what i would be in favor of. the reason i say that is because the alternative approach, of course, is to implement some sort of territorial system, but i think those types of systems, to design them appropriately, would have to recognize instances where earnings were not subject to robust tax systems abroad and you have to introduce all sorts of
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exceptions and exclusions and base broadening provisions. by the time you introduce those, you're sort of right back where you started. so i am largely in favor of ending deferral and lowering the rate as a means of simplification. >> dr. merrill, unless you want to add anything, i'll recognize senator thune. was there anything you wanted to add? >> why don't you take mr. thune's question. >> very good. senator thune. >> thank you, mr. chairman. i want to thank you and senator hatch for holding this important hearing. thank you, all, for making time to share your expertise with us. i suspect there are significant differences about how we improve the u.s. tax code, differences of opinion among members here in the finance committee and probably in the senate and the congress. but i think that all of us agree that we want american companies to be competitive. we want for them to be able to compete and win in the global marketplace. i think, unfortunately, we ask them to do it with one hand tied
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behind their back because we actually make the rules they play by. when you make bad rules, you get bad outcomes. there are economic signals right now that are driving a lot of the decision making that our businesses are following. so i think some of this inflammatory rhetoric and accusing them of not being economic patriots is really not helpful. and i would hope that we could focus on not just the symptoms but actually the cause for these problems. and that is we have an outdated, dysfunctional tax code with the highest rate in the developed world. and we're also one of the only few countries in the world that continues to use the worldwide system that hasn't moved to a territorial system. i shouldn't say in the world, but certainly one of the few countries in the oecd. so i just think that we need to focus on the problem here.
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the problem is the high rate. there was a time when we were back in 1986 when the tax code was last reformed where our corporate tax rate was five points lower than the average. now it's about 14 points higher than the oecd average. it is only -- i mean, this is what you're going to get when you have these kinds of rules. we need to change the rules. we need to reform the tax code. so i guess it seems to me, at least, that the system is basically the worst of all worlds. because we've got -- if you're asking your businesses to compete in the foreign marketplace, not only do we have the highest corporate income tax rate among oecd nations, we're also one of the few nations that has a worldwide system of taxing income. so dr. merrill, i guess i would ask you, could you elaborate a little on your testimony in term of what this means for a u.s.-based company competing in foreign markets against companies that are based in nations with more modern and favorable tax systems. >> yes, thank you.
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so what we're seeing is a world where a u.s. company that operates abroad is now generally competing with foreign competitors in the same market but facing a very different home country tax system. they all face the same rules in the country where they're operating. the difference is they face different home country taxation. so if the u.s. company earns income abroad and wishes to invest it back home in the united states, bricks and mortar, if it wants to use the money to give back to its shareholders, if it wants to use the money to pay higher wages to its workers, it faces a u.s. tax on that repatriated earnings that would not be the case if it was a foreign headquartered company under a territorial-type system.
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so we see this manifesting itself in u.s. companies stuck in a way building up cash abroad that they would like, in many cases, to return to the u.s. to invest here, to use for a variety of purposes. but if they do, they would face the highest tax rate in the world in bringing it back. so that is a very important driver of why a u.s. company is not particularly an attractive target when they go out to buy a foreign company. if you're a shareholder in a foreign company and a u.s. company says, gee, i'd like to buy you, you realize that means that if you're acquired, any foreign profits that will be distributed to you have to go through the u.s. corporate income tax system. if you're purchased by a foreign acquirer, that's not the case. it makes it harder for u.s. companies to make foreign acquisitions. it makes it harder for them to
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even invest back at home. >> and there seems to be a misperception about what this -- the way some of this has been covered at least in the press articles. it's implied that u.s. companies are somehow changing the taxation of their u.s. income through these deals. isn't it the case that income earned in the united states remains subject to u.s. tax regardless of the corporate structure? >> u.s. company that moves its legal headquarters abroad is still subject to u.s. income tax on its u.s. operations. it's still subject to tax if it brings back the foreign earnings it has previously earned in its foreign affiliates. >> and this is a question -- one more, mr. chairman. there's a suggestion in the administration's proposal that we attempt to stop corporate inversions in that, you know, there's a concern about some of
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the steps being taken designed to stop them could create more harm than the inversions themselves. in particular is a concern this management control test that's being advanced by the white house and some here in the senate could have the effect of encouraging mergers whereby management control would be outside of the united states. what's your view on that issue? >> congress has a long history of trying to address inversion transactions, and each time finding unintended effects. congress tried in '84. the irs tried about ten years later in '94. of course, congress in 2004 adopted legislation, each time trying to deal with the transaction of the day. and what happened is companies found different ways to achieve what the economic incentives are driving them to do, which is to have the assets owned in a tax jurisdiction that's more favorable. so the concern would be that, you know, another stop-gap
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measure could lead to kinds of transactions that are not desirable from a u.s. standpoint. a true foreign acquisition of a u.s. company where the haur's jobs are abroad and the u.s. headquarters shrinks. >> mr. chairman, i thank you. i appreciate the answers to these questions. i would ask if i could get my statement, entire statement, which i didn't use all of included in the record. again, point out that we got a problem here. the problem is our tax code. >> without objection, it is so ordered. >> thank you, mr. chairman. >> senator thune, you may not have been here when i made this point. i am fully committed to working with you and colleagues on the other side of the aisle for the ultimate cure, which is fixing this dysfunctional mess of a tax system. the question is, what are we going to do about the damage that's being done right now? senator portman, do you have any other questions you'd like to ask? >> thank you. why don't you go ahead.
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>> i have no other questions. >> can i just do a quick, quick round? >> of course. >> with the team here. first of all, i quote you all the time because chairman widen makes the point the tax code is 100 years old and it looks like it. so i appreciate your attitude about wanting to pursue reform. i'm concerned that by taking this detour it's going to make it harder, not easier. again, the unintended consequences we talked about, including accelerating this acquisition of u.s. companies by foreign entities. the joint committee on taxation, which is our official nonpartisan scorekeeper has said with regard to the president's proposal in his budget last year, mr. stack went through those in his testimony, and these are mostly international tax revenue raisers to deal with some of these issues. they said, and i quote, many of these proposals may make corporate structures with a domestic parent relatively less attractive than corporate structures with a foreign parent.
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and because these proposals are likely to raise u.s. tax liability, parent structure more than the foreign parent structure. seems pretty clear. and that's not republicans or democrats. these are our nonpartisan arbiters as to what we ought to be doing in terms of good tax policy. i guess one question i would love to hear from this distinguished panel is, dr. robinson talked a little about access to capital. the most efficient flow of capital obviously is a big disadvantage to u.s. companies now. forget the rate. even forget kind of the general notion of territorial versus worldwide. the fact is these u.s. companies are not as nimble. they can't move assets around where they need them. and i think that has to be addressed. here's my question. sometimes when i debate my colleagues on this issue, they say, well, just because a company is foreign doesn't mean they don't have u.s. jobs, which is true. anheuser-busch still has u.s.
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jobs. they sell a lot of beer in america. their market share is in good shape. maybe, peter, if you could address this or dr. desai or dr. robinson, whoever has looked into this, but can you tell us about what happens when -- peter talked about fortune 500 companies over the last 15 years. you've seen a one-third reduction in u.s. companies. what happens? what is the impact on jobs when you see u.s. companies being acquired by a foreign company? >> yeah, i have not actually studied that issue. it could go either way. if the foreign company is a better managed company, bring in new technology, it could increase jobs. on the other hand, it could go the other way. i don't know what the actual experience has been. >> dr. desai? >> i think you're right to put this in the context of a broader market for corporate control,
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which is really the issue with foreign acquisitions. i think the issue with foreign acquisitions is particularly with respect to high value added headquarter jobs, those may well get relocated when it becomes foreign owned. that is something that we have seen at least anecdotally. we also know that headquarter jobs are really important. they give rise to lots of economic spillovers more generally. for that reason, i think you're right to be suspect of the potential for these foreign acquisitions, which is they can lead to high-value added jobs going abroad and in particular headquarter jobs. >> dr. robinson? you do any research on this? >> i was going to say, i don't have anything to add concrete. i've not done any research in this area. >> let me just assert something that's probably pretty obvious. when a company chooses a domicile somewhere else and when the headquarters moves, which often happens, there's an intangible impact. so the companies in, you know,
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our great cities in america are major benefactors. companies in my home state of ohio are involved in every single nonprofit in one way or another. and often provide a lot of executives to, you know, help to lead these nonprofits and charities and obviously make huge contributions. i've love to see some research on that. i do think this is sort of the intangible impact of companies pulling out of the u.s. it hasn't been given adequate focus and research. so if any of y'all have any thoughts on that, i would love to see if we could look into that. certainly on the jobs front, we'd like more information. but also on just intangible benefit. what happens? why does it matter? i think it matters. i think my colleagues do. that's why we're working hard on this. i think we need better information to be able to explain this more in terms of the impacts, the negative impacts to our constituents. thank you, mr. chairman.
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>> thank you, senator portman. at this point, i'd ask unanimous consent that a statement by senator levin be included in the hearing record. without objection, the statement will be included. let me leave you all with one thought that we really haven't, i think, gotten into much this morning. it seems to me it would be one thing if there were just a few of these inversions. in other words, if there were a few of them, we'd work, as we've talked about this morning, on comprehensive, bipartisan, you know, tax reform. we fixed it, and then we wouldn't be back here again in another decade. part of what has influenced my judgments is that's not going to happen. and i spoke a couple hours ago about reports from the financial press about this feeding frenzy. that's what's actually going on out there.
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it's not a few of these inversions you could put to bed with comprehensive tax reform. according to the financial press, it is a feeding frenzy where you have the investment bankers going out to all the possible companies with their slide decks and say, you better do this quickly. and the reality is that tax reform is moving slowly and the inversions are moving very rapidly. as i indicated before, i think that's a prescription for real chaos. so you could hear from the senators here today. wasn't a lot of shouting and a lot of screaming and finger pointing. a lot of goodwill here. my hope is that with your good accounts, very thoughtful testimony, you can help us address both of these tasks. to close the inversion loophole and then move on to the great challenge in front of this
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committee. that's the real cure, which is comprehensive bipartisan tax reform. with that, finance committee is adjourned. saturday marks the 40th anniversary of richard nixon's resignation as president of the united states. this week american history tv looks back at the summer of 1974
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and president nixon's last days in office. tonight the house judiciary committee's impeachment hearings against president nixon. we'll get opening statements from members of the committee starting with its chairman, new jersey congressman peter redino. that starts at 8:00 p.m. eastern on c-span3's american history tv. on c-span the western conservative summit with sarah palin called for the impeachment of president obama. >> these days you hear all of these politicians, they're denouncing barack obama saying, oh, he's a lawless imperial president and ignores court orders and changes laws by fiat and refuses to enforce laws that he just doesn't like. that's true, but the question is, okay, politicians, what are you going to do about it?
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[ applause ] let's call their bluff. i'm calling their bluff because we need a little less talk and a lot more action. there's only one remedy for a president who commits high crimes and misdemeanors, and it's impeachment. it's the "i" word. >> you can see all of sarah palin's remarks and other speakers from this year's western conservative summit tonight at 8:00 eastern on c-span. c-span2's book tv this weekend, friday night at 8:00 eastern with books on marriage equality, the obamas versus the clintons, and the autobiography of former mayor of washington marion barry, jr. john dean is interviewed on the watergate scandal. and we shed light on the
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library's past, present, and future. a state department official told congress recently the islamic militant group isis is not just a terrorist organization but a full-blown army. the official deputy assistant secretary of state for iraq and iran brent mcgurk testified before the house foreign relations committee for 2 1/2 hours. this hearing will come to order. >> this morning we consider the u.s. response to the terrorist takeover in iraq. nearly six months ago the committee held a hearing, al qaeda's resurgence in iraq, a threat to u.s. interests.
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then the administration testified that they had started to shift resources from syria to iraq in 2013. that it had triple ed its suici attacks in that year and it planned to challenge the iraqi government for control of western iraq and baghdad. that's what we heard six months ago. the administration testified that it had become aware that isis had established armed camps, staging areas, and training ground in iraq's western desert in the summer of 2013 and that isis leaders had threatened to attack the united states of america. we were told isis must be, in their words, constantly pressured and their safe havens destroyed and that its objective was, quote, to ensure that isis can never again gain safe haven
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in western iraq. however, what the administration did not say was that the iraqi government had been urgently requesting drone strikes against isis camps since august of 2013. that there had been the opportunity to use drone strikes on those camps both in eastern syria before they came over the border and to use drone strikes as their units moved across the desert. as you know, drones can hone in and can see what's going on on the ground, can see these units traverse from city to city. these repeated requests, unfortunately, were turned down. i added my voice for drone strikes as isis convoys raced
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across those deserts from city to city, and since that last hearing, isis has done over those six months precisely what the administration predicted it would. it has taken over most of western iraq. it has turned its sights on baghdad and it may be preparing to launch attacks against the u.s. but again, no drone strikes against those columns. never has a terrorist organization itself controlled such a large resource-rich safe haven as isis does today. never has a terrorist organization possessed the heavy weaponry, the cash, personnel that isis does today, which includes thousands of western passport holders. the iraqi population is terrorized. they have suffered mass executions and harsh sharia law. last week the remaining members of the ancient christian community in mosul fled on foot
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in face of isis demand that they convert or face death. to be clear, isis' takeover has been aided by prime minister maliki's mall fee saps and incompetence. maliki has disastrously failed to reconcile with key sunni groups. many, including myself and ranking member engel, urged him to form an inclusive government, and this was quite some time ago and on several occasions, so that isis could not exploit legitimate sunni grievances. maliki has only proven himself to be a committed sectarian, certainly no statesman. it is time for iraqis to move forward in forming a government that serves the interest of all iraqis. what started as a crisis in syria has become a regional disaster with serious global
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implications, including credible threats of international terrorism, humanitarian disaster, and upward pressure on energy prices in a fragile global economy. meanwhile terrorist forces and the iranian government are gaining power at the expense of friendly governments. of course, only iraqis can control their future. only they can make the decision to replace maliki. and the performance of the battlefield of certain iraqi units was abysmal. that's to be expected when you put your son in charge and you sack the officer corps and replace them with cronies. but anyway, americans have spent enough blood and treasure in iraq. that's exactly why the administration should have taken the opportunity to inflict decisive damage on isis from the air through drone strikes while its fighters were encamped in
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the desert months ago. this morning we are joined by a senior state department official who has been in baghdad for several weeks and an official from the department of defense involved in the current assessment of iraqi security forces to learn of the path forward in dealing with this national security emergency. and i'll now turn to our ranking member, mr. engel of new york, for any opening comments he may have. >> mr. chairman, thank you for holding this important hearing about the latest developments in iraq. in recent months a path of violence and chaos has burned across the middle east. the unrest has left thousands of dead in its wake and driven tens of thousands from their homes. a civil war in syria has spilled across the border and now iraq teeters on the brink. since december the islamic state of iraq, isis, has marched across iraq with leath
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efficiency. >> fallujah and mosul has fallen to their control. hundreds of soldiers have been killed or have laid down their weapons and the military equipment they left behind. some supplied by the united states is now in the hands of these fanatics. the border between iraq and syria is gone. isis is advancing towards the jordanian border and isis' leaders have promised to rule with a brand of bab berism in some of the darkest chapters in human history. isis is a threat to our region and a threat to the united states. we have seen this story before and know how it ends. when russia withdrew from afghanistan in the late 1980s, that country was allowed to become a no man's land. violent extremists found a safe haven to strengthen their ranks, train their recruits and plan attacks on the united states and their allies. we cannot allow iraq to follow the same path.
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to become another safe haven for another september 11th could be launched. how are we going to meet the challenge? we need to use all the tools at our disposal because in the end there's no military solution to the problem. we need to see political changes in iraq, more inclusive policies and a greater effort to avoid sectarian conflict. i have real doubts that prime minister maliki can lead iraq into this new era. in fact, maliki must go and the sooner the better. i have real concerns about iran's support for the iraqi regime. even if the united states and iran seem to share a mutual concern over isis, i don't see how iranian and american goals can be aligned in the short-term or the long-term. i don't think the u.s. should deal with iran in this regard. we also need to bear in mind that this is not solely an iraqi problem. while isis grew out of al qaeda in iraq, isis grew in strength and numbers while fighting in syria. isis is a regional problem. this is a spillover from the syrian civil war and fighting isis will require a regional
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solution. the right time to train and equip the moderate syrian opposition was well over a year ago. that's when i introduced the free syria act that would have assisted moderate rebels to fight against both the assad regime and the extremist elements of the opposition like isis. i'm glad that a few weeks ago the administration announced its support for a $500 million train and equip program for the moderate syrian opposition, but we wait sod long and by now isis has gained so much territory and momentum they are far more difficult to stop than they were a year or two years ago. i can't help but wonder what would have happened if we had committed to empowering the moderate syrian opposition last year. would isis have grown as it did? would the opposition have been able to apply enough pressure to assad to compel him to a diplomatic transition?
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and by the way, we passed a bill in the house yesterday unanimously slapping sanctions on hezbollah. hezbollah has moved in as a puppet of iran and moved into syria on the side of assad and have helped tip the balance in assad's favor. the hypotheticals and the what-ifs break my heart because even if we do the right thing, it will mean small consolation to the orphan child, the grieving mother, or the family in a refugee camp in syria. i support the president's decision to send teams to iraq, but i'm cautious about future action. we can't end up in another sectarian quack mire quagmire in iraq. i'm grateful to our witnesses for testifying today and for consulting with congress about our next steps. we must be partners moving forward as we determine what the u.s. role should be in iraq and the congress must play an
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important role. thank you, mr. chairman. >> thank you, mr. engel. we go now for a minute to miss ross lateen of florida, chairman of the middle east and north africa subcommittee. >> thank you so much, mr. chairman. today's hearing is on the terrorist march in iraq. this is not something new or something that caught us unawares. this will be the second time this committee has had mr. mcduring testim mcgurk testifying on the deteriorating situation since february. it's clear that the situation went from worse to just about as bad as it can get and i'm interested in hearing in how the administration has adjusted its policies since then because the three steps that he outlined for us last time, pressing the government to develop a holistic policy to isolate extremists, supporting iraqi security forces through accelerated military systems and information and intelligence sharing and mobilizing the sunni population
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against isis have all failed to stop isis and the near collapse of iraq. isis continues to advance its cause of islamic state that runs from baghdad to lebanon and where christians especially are being targeted, eithering fleeing, forced to convert, or be killed. we have been woefully inadequate in our response to this crisis. the committee has repeatedly called on the administration to do more, to get more engaged and to be decisive because it has been paralyzed by inaction. the threat of isis is very real and imminent for iraq and the region, and it won't go away by just wishing it away. thank you, mr. chairman. >> thank you. we now go to mr. ted deutch of florida. ranking member of the middle east and north africa subcommittee. >> thank you, chairman, for holding today's critical hearing and for the witnesses for appearing today. deputy assistant secretary mcgurk, i know you just returned from several weeks in iraq. i hope you will be able to
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provide an update on efforts for political reconciliation. the violence perpetrated by isis in its request to establish an islamic caliphate is terrorizing these nations. according to the u.n., 1,500 people were killed in the month of june in iraq and the news of this weekend's horrific persecution of christians in mosul adds another layer to this sectarian conflict. with financial independence isis answers to no one. having disavowed even al qaeda and it's hard to imagine a terrorist organization being so vile that the vile al qaeda did not want to be associated with it. but as isis continues its march towards baghdad, how confident are we that the shiite stronghold can withstand regional attacks? what are the regional players doing? and what are we doing to ensure the stability of our regional partners? also i hope you'll address what more we can or should do to convince prime minister maliki that isis can't be defeated
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without some sort of reconciliation process that reverses his attempts to marginalize sunnis. is he willing to do that? will he ever be willing to do that? how does this proceed if he doesn't? and i'll look forward to testimony from both of you and i'll yield back. >> we now go to mr. ted deutch of texas, chairman of the subcommittee. >> he's not the chairman yet. >> mr. ted poe. >> i much prefer florida also. >> thank you, mr. chairman. isis is blitzkrieging across the north of iraq and they have their sights set on baghdad. isis is made up of a bunch of bad outlaws and a hearing i held on this issue just last week our witnesses were unanimous in the belief that prime minister maliki just cannot lead iraq out of this crisis. he needs to go. the sooner, the better.
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the iranian influence needs to end in the iraqi government. the united states should not strengthen maliki's hand for providing unconditional military assistance. that's not the answer. i want to know what the administration strategic plan is to prevent the rise of isis. what's the plan, if any? mending relations with the saudis would be a good place to start and finally they are still held hostage in iraq. i want to know why we have failed to settle them in third countries including our own while the u.s. has dithered people have been murdered. i yield back. >> go to brad sherman from california, ranking member of the terrorism nonproliferation subcommittee. >> we see emerging from beirut to basra an infertile crescent where militias loyal to ethnic or religious group are more
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powerful than governments. where there is warfare, but even when there is peace it's an unstable peace with militias in real control no matter what the map says about nation states. it's a three-way contest between the moderate sunni, shiite alliance and extremist sunni. i believe that the shiite alliance led by iran is the greater threat to the united states. this does not mean that we should not seek to weaken isis. maliki is not a good guy just because we installed him. his approach to governing is as responsible as any other factor or isis' emergence, and in the absence of isis pressure, he would not have changed at all. and now we need a new prime minister in iraq. a distant second best would be some sort of radically changed maliki platform.
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maliki allows his air space to be used for planes flying to syria from iran carrying weapons and thugs. he's increasingly dependent on iran. we do not want to be his air force. we do not want to see isis expand. we've got a tough problem. >> indeed. we're joined this morning by the deputy assistant secretary for iraq and iran mr. brett mcgurk and the principal deputy, assistant secretary of defense for international security affairs, miss elisa slotkin. >> it's el issa. >> thank you, elissa. >> prior to his current assignment mr. mcgurk served as a special adviser to the national security staff and a senior adviser to ambassadors ryon crocker, christopher hill and james jeffrey in baghdad. he also served as a lead negotiator and coordinator
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during bilateral talks with the iraqi government in 2008. since july 2013, elissa slotkin has been performing the duties of the principal deputy under secretary of defense for policy. previously limiss slotkin worke at the state department and served on the national security council staff as director of iraq. without objection the witnesses' full prepared statement will be made part of the record. members will have five calendar days to submit statements or questions or any extraneous materials that they wish to put into the record, and, mr. mcgurk, if you would please summarize your remarks, we'll have you testify first. >> thank you. good morning. chairman, royce, members of this committee, i want to thank you for inviting me to discuss the situation in iraq with a focusen the u.s. response since the islamic state of iraq or isis attacked mosul. let me review why this matters.
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isis is al qaeda. it may have changed his name, broken with senior al qaeda leadership, but it is al qaeda in its doctrine, ambition, and increasingly in its threat to u.s. interests. in fact, it is worse than al qaeda. should there be any question about the intentions of this group, simply read what its leader says, and it is important to pay attention to what he says because we cannot risk underestimating the goals, capacity, and reach of this organization. baghdadi in may 2011 eulogized the death of osama bin laden and promised a violent response. isis training camps in syria are named after osama bin laden. in his audio statements, he regularly issued veiled threats against the united states. and in his feud with al zawahiri, baghdadi clear si ly seeking to lead the global jihad. isis is no longer simply a terrorist organization. it's now a full-blown army
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seeking to establish a self-governing state through the tigris and euphrates valley. it controls much of eastern syria. in january in iraq it moved into anbar province taking control of fallujah and on june 10th it moved on mosul. i arrived about 80 kilometers east of mosul june 7th and i'll begin there. in meetings with local officials and with kurdish officials on june 7th, we received early indications they were mo offing in force from seyria to iraq. we asked and received permission to deploy forces but the government of baghdad did not share the same sense of urgency and did not approve the deployments. iraqi military commanders promised to send nine brigades of force to mosul in response to our warnings and we stressed that the forces would not arrive in time. on june 9th the situation remained extremely tense and we continued to urge the immediate
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deployment of additional security forces to protect against an isis attack from west to east. in the early morning of june 10th, isis launched a complex suicide bomb attack across a strategic bridge and poured forces into the eastern part of the city. iraqi resistance totally collapsed which led to a panic and a snowballing effect southward through the valley and through the cities of tikrit, samarra, and that balad. the result was catastrophic. five iraqi divisions nearly dissolved and the approaches to baghdad were immediately under threat. i flew to baghdad first thing that morning with a focus on ensuring our people were safe and that the northern approaches to the city were bolstered. my written system sets forth in detail the critical elements of our immediate crisis response. we first made certain that our people would be safe, including contractors working on bases outside of baghdad who were evacuated with the help of the iraqi air force. at the embassy and the airport, we rebalanced staff to manage
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the crisis and brought in additional department of defense resources to ensure the security of our facilities. in parallel and at the president's direction, we worked to improve our intelligence picture throughout western and north central iraq surging surveillance flights from one per month to nearly 50 per day, establishing joint operation centers and deploying special pricays operation forces. these intelligence and security initiatives were undertaken to focus attention on this serious threat. following national elections that were held on april 30th in which nearly 14 million iraqis voted but before the formation of a new government. this process of forming a new government remains extremely challenging but it now has some traction. a new speaker of parliament was chosen last week overwhelmingly with the support of all major
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communities in iraq and the iraqis are proceeding along the constitutional time line to choose a new president and prime minister. the current situation remains extremely serious. isis remains in control of mosul and it is targeting all iraqis, sunni, shia, christian, kurds, and everybody who disagrees with its twisted vision of a seventh century caliphate. it's also joined in an unholy alliance with militant wing of the former baath party and the islamic army of iraq. going forward the iraqi was our support must seek to split the latter groups from isil and isolate them from other hard core militant groups from the population. the platforms we have established through the immediate crisis response are providing additional information to inform the president and our national security team as we develop options to further protect our interests in iraq. any future decisions in this regard will be made in full consultations with this committee and the congress.
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any efforts we are to take moreover must be in con jurntion with iraqi efforts to isolate isil from the population. this is because while we have a very serious counterterrorism challenge in iraq, iraq has a very serious counter insurgency challenge and the two are inextricably linked. based on my last seven weeks on the ground in iraq, there's a clear recognition by iraqis from all communities that substantial reforms must be undertaken and undertaken urgently. this will require the formation of a new government together with the restructuring of the security services. the emerging consensus in iraq, which we can fully support, is a functioning federalism consistent with iraq's constitution, adaptive to the new realities on the ground, and based on five principles. first, local citizens must be in the lead in securing local areas. second, local citizens defending their communities however must be provided full state benefits and resources. perhaps modeled along the lines of a national guard type force
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structure to secure provision areas and areas in which isil is seeking to gain further foot holds. third, the iraqi army should focus on federal functions such as protecting international borders and rarely deploy inside cities. it should, however, provide overwatch support for local forces where they confront isil which is able to overmatch tribal forces. fourth, there must be close cooperation between local, regional, and national security services to gradually reduce operational space por isil particularly in the province and finally the federal government through its new parliament and a new cabinet must work diligently on a package of reforms to address legitimate grievances from all communities and ensure adequate resources to restructure security services. these five principles can begin to address many of core grievances in the sunni areas of iraq while also importantly denying space for isil to operate and protect the shia majority and other vulnerable
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groups from attacks. it will require a smart, integrated approach led my a new iraqi government with an appropriate level of support and assistance. i can report that iraqi leaders have asked for this assistance in implementing such a program and general austin, commander of centc centcom, will be in iraq tomorrow to discuss concrete ways in which our assistance might be effective. this model of a functioning federalism is achievable and essential if we hope to deny space for isil within the borders of iraq. i look forward to discussing more details and once again i want to thank this committee for allowing me the opportunity to address you here today. >> thank you. elissa? >> thank you, chairman royce, ranking member engel, distinguished members of the committee. appreciate the opportunity to come and talk about the department of defense role particularly. i won't cover too much ground other than to just foot stomp
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the point that brett has made. the u.s. really does have a vital national security interesting in ensuring iraq or any our country doesn't become a safe haven for terrorists who could threaten the u.s. as the president has said, isil's advance across iraqi territory in recent weeks and particularly its ability to continue to establish a safe haven in the region poses a threat to u.s. interests and to the greater middle east. and we do not restrict that view just to the specific geographic boundaries that are on the map. just to go over the things that the department of defense is doing. the situation on the ground, as brett described, is extremely complex and fluid. we are therefore taking a very responsible, deliberate, and flexible approach to the crisis, but i do want to be clear there will not be an exclusively military solution to the threat posed by isil. iraqis must do the heavy lifting. in the meantime, the department
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of defense remains postured should the president decide to use military force as part of a broader strategy. our immediate goals as announced on june 19th are, one, to protect u.s. people and property in iraq. two, to gain a better understanding of how we might train, advise, and assist the iraqi security forces should we decide to do so, and, number three, to expand our understanding, particularly via intelligence of isil. all three are critical to any future u.s. strategies vis-a-vis iraq. and to that end, we have done the following things. one, as pregnant mention brett added forces to protect our people. the safety of u.s. citizens and personnel throughout iraq is our highest priority. the department of defense is meeting all the requests that have come in from the department of state for security, extra security for our embassy, and at the airport. as described in our war powers notifications, we've sent a fleet anti-terrorism security
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team. we call that a f.a.s.t. team a crisis response element, an additional military asset and personnel to reinforce security at the diplomatic facilities. the secretary of defense ordered the "uss mesa verde" in the arabian gulf. it adds to the other nafl ships that are there, including the u.s. aircraft carrier "uss george h.w. bush" and provides the president additional options to protect u.s. citizens in iraq. as part of our ramping up effort, we have significantly surged isr capabilities into iraq. as brett mentioned, over 50 sorties a day compared to one a month in previous months. at the request of the government of iraq, we have ramped it up as well as our information sharing initiatives with the iraqis. they sorties over iraq provide us a much better understanding
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ofi sil operations and disposition and allows to help the isf counter isil. we're now capable of around the cop coverage of iraq and have been focusing particularly on isil controlled activities -- territory, excuse me, as well as in and around baghdad. u.s. assessment teams and joint operation centers, as you know, we have put in -- nearly 300 additional u.s. military advisers who have gone in specifically to assess and evaluate how we might better train, advise, and assist the iraqi security forces. these are small teams of special forces members who are working to evaluate the iraqi security forces, particularly in around baghdad. they are armed for self-defense but they do not have an offensive mission. the two joint operation centers as brett also mentioned, one in baghdad, and one in northern iraq, have been established to help coordinate and support efforts on the ground, give us a
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better picture of what's happening. one quick word about the assessments. i know that's of interest. secretary hagel and chairman dempsey received the draft assessment department leaders are taking a deliberate approach and reviewing this pretty length thilengthy assessment. these assessments will inform recommendations to the president. meanwhile, additional assessing work goes on in and around baghdad with respect to the developing situation on the ground. in closing, i want to reiterate we believe we have a vital security interest in ensuring that iraq does not become a permanent safe haven for terrorists who could threaten the u.s. homeland. look forward to questions to that end. >> i thank both of our witnesses. we have before going to questions, i would like to welcome our newest member who's here today with us and that's
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congressman curt clawson representing the 9th district of florida. while he's the newest member of the house, he's not new to international issues as ghon straited by fluency in four languages. in the time he's resided in six countries aboard. his previous work as ceo of a global manufacturing company and broad understanding of different cultures will be an asset, we believe in the committee's work to promote freedom in u.s. interests around the world and note that the appointment brings our committee delegation from the state of florida to seven members, second only to the eight members hailing from the great state of california. in terms of questioning, if we could start now with mr. mcgurk, as i mentioned in my remarks, you testified before the committee in february and you told us of isis's plan to take
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control of iraq and to challenge the iraqi government's control of baghdad. you reported it was the administration's objective to prevent isis from ever having a sanctuary in western iraq again. there were countless other warning signs. i know that you, as deputy assistant secretary and others in the u.s. government, were sounding the alarm. your testimony was absolutely correct. we did see this coming. that makes it more troubling, that the administration didn't do what was necessary necessary to prevent isis from taking over such a large swath of iraq, and specifically, the iraqis asked multiple times for drone air strikes against clearly identifiable isis targets in the desert. someone in our embassy brought this up, as well. the agitation was for strikes on
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terror camps. we know that the administration rejected those requests. now, no one likes malaki, but given this isis threat, and given the administration's stated goal of preventing an isis sanctuary in western iraq, why didn't we support at least in this limited way attacks that would have done damage to these columns or to the encampments? >> thank you, mr. chairman. let me try to correct the record on a few things. again, i thank you for the opportunity to testify before the committee in february and i think what i described was when we started to see this problem emerge over the course of last summer, and the first principle and the president's policy is
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we want to enable local actors to be able to secure their sovereign space as best we can. that was also the desire of the iraqi government. the iraqi government wanted to act on its own with our assistance in enabling functions. we worked through the summer and fall through our own surveillance and also by showing the iraqis how they could use their capability to be able to target some of these sites. they have a platform called a king air, which does persistence intelligence. they have a caravan aircraft which can fire missiles, and we are with our information to jerry rig the systems to be effective and they were effective against those camps. the formal request for direct air support did not come in a formal way until may. i was there with general lawson during that visit and a subsequent phone call between the prime minister and the vice president. since this time, obviously, we have been looking at various options. but the first principle was to enable the iraqis to deny safe
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havens and camps and sanctuaries within their sovereign space. they of course faced a significant problem across the syrian border, which was increasingly in control of isis, as over the last three months of last year and the border increasingly became under threat. the first principle was to enable the iraqis. that was there is the hellfire missiles, and through the persistent isr. but the formal request came in may. >> let me just say that we already have experience in afghanistan with the fact that when you're dealing with suicide bombers, you know, people who want to martyr themselves in the attack, the one thing on the ground, for example, that afghans are looking for are air support. you know? traditionally, secular militaries run away in the face of a person trying to lose their
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own attack in an attack. and they call in air support. it's been a problem -- i mean, i talked to the italians about this. what do they want? what do they ask for? drones above that could give air support for their troops in afghanistan. so you've got a situation like this. yes, you've got hellfire missiles, but the iraqis were trying to fire these from retrofitted cessna airplanes. in an environment like that, when you see this coming and you that air support, psychologically for infantry on the ground in this kind of an environment has been such an issue in afghanistan, you know, when you're up against jihadists, why wouldn't we -- it wasn't just that the request was coming from the iraqi government. as i say, some in the embassy pushed for this. certainly, i raised this a number of times. i'm just trying to figure out
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why, when you can monitor something with the eyes of a drone that can go in and actually see below it, you know, that you have in the jeep the flag of al qaeda waving and a column moving across the desert, why that asset wouldn't be deployed as these troops are coming out of syria. or why you wouldn't take the encampment, and come in and take out the encampment. i understand this request went all the way up, you know, in the administration and was turned down. i just -- i'm trying to get to the bottom of why. >> first i want to answer from my own perspective. first, the iraqis are very effective against the camps with the hellfires especially over the latter course of 2013. isil kind of poured out of the camps, particularly when they started to be hit and moved into the cities. >> yeah, yeah. but again, that is retro fitted, retro fitted cessna airplane.
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this is what i understand from the iraqis. that they were trying to deal with to try to express that. can you imagine how effective it would have been with something, you know, a platform that could really deliver something more than a hellfire? >> i just want to correct the record. when the normal request came in may for direct air support, that request never went up and denied. it's still under active consideration. there's never been a denoil. >> that's like saying, if i could interrupt you. i remember eliot engel making the point three years ago about support of the free sir dwran army when there were no foreign fighters in syria and him laying out the argument that foreign fighters were going to come in the absence if we didn't come the free syrian army. that's like saying, well, that's still under active consideration. well, yes, but after three years of not effectively getting engaged in a major way, you know, the clock begins to run
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out and things happen on the ground. and that is what's happened with isis. we watched it come into a vacuum over a three-year period, establish itself on the border with iraq. no action being taken against that encampment. no effective support to the free syrian army to do something about it. then we watched it go from city to city across iraq without it being hit from the air with drones, despite the request that i know were being made. this is the reason for at least on my part concern about the lack of action here. >> i was just on thursday of last week before flying back i was in our new joint operations center set up in baghdad and i can say that the information we have now on these networks is night and day from where it was in may when the request from the iraqis first game in. therefore, the options being developed for the president will be much more concrete and
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specific than anything we could have had before and there's a significant risk, mr. chairman, of taking any action without that level of security when the request came in may, we were not able to do anything immediately in any event. we have a much better picture to form eventual decisions from the president and any decisions in that regard made or might be made or considered in the full consultation with the committee and the congress. >> right. but isis has the treasury of the central bank in mosul so they have at their disposal, you know, probably half a billion dollars. >> they have good propaganda. they put out $4.5 million in the first week or so. we don't think that's particularly true. they are a self sustaining organization and flush with resources, cash and equipment, no question. >> i'm out of time. i'll go to mr. engel. >> thank you very much, mr. chairman. and brett and elissa, thank you for your testimony and for your good work.


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